IN THE MATTER OF ESTATE DUTY PAYABLE ON THE Revenue-Estate Duty-Mortgage of Settled Property Value of Property Passing on Death of Tenant for Life-Finance Act, 1894 (57 & 58 Vict. c. 30), s. 2, sub-s. 1 (b); s. 7, sub-s. 1 (a), sub-s. 7 (b). Property being settled upon a father for life with remainder to his son in tail, the father and son joined in executing a disentailing assurance whereby they settled the property to such uses as they should jointly appoint, and subject thereto in the same manner as it was theretofore settled. The father and son jointly borrowed money on mortgage of the settled property, and under their joint power appointed the property to the mortgagees. The money so borrowed was applied partly to the use of the father and partly to the use of the son. In 1895, while the mortgage was still subsisting, the father died, and the son succeeded to the equity of redemption of the settled property : : Held, that for the purposes of computing the value of the property passing on the death of the father and liable to estate duty under the Finance Act, 1894, there must be deducted from the gross value of the settled property the whole amount of the mortgage debt, including the portion of it applied to the use of the son. PETITION of Henry Arthur Mornington, Earl Cowley, on appeal from the Commissioners of Inland Revenue under s. 10, sub-s. 1, of the Finance Act, 1894, pursuant to rule 3 of the Rules of the Supreme Court under the said section. On July 25, 1863, the Earl of Mornington died, having by his will devised and bequeathed the residue of his real and personal estate to trustees to pay certain annuities, and subject thereto in trust for Henry Richard, first Earl Cowley, for life, and after his death in trust for William Henry, second Earl Cowley (then Viscount Dangan), for life, and after his death for the first and other sons of the second Earl successively in tail male. On July 15, 1884, the first Earl Cowley died, and the second Earl Cowley became entitled in possession. By various indentures of mortgage the second Earl Cowley mortgaged his life interest in the trust property to the London Assurance Corporation for sums amounting in all to upwards of 140,000l. On January 13, 1887, the petitioner (then Viscount Dangan), the eldest son of 1897 March 29, 30; April 1; 1897 EARL COWLEY'S ESTATE, In re. the second Earl, attained the age of twenty-one. On January 14, 1887, a disentailing assurance was inrolled in the High Court, which witnessed that the second Earl and the petitioner joined in resettling the trust property to such uses as they should jointly appoint, and until such appointment to the use of the second Earl for life by way of restoration of the estate previously vested in him, with remainder, subject to a jointure to the second Earl's wife and a portion for a younger child, to the petitioner in tail with remainders over. By an indenture of mortgage dated June 8, 1888, and made between the second Earl and the petitioner and the Prudential Assurance Company, after reciting that there was then due from the second Earl to the London Assurance Corporation in respect of capital and interest the sum of 150,853l. 6s. 7d., and that the Prudential Assurance Company had agreed to pay off the said sum of 150,853l. 6s. 7d. due to the London Assurance and to advance to the second Earl and the petitioner a further sum of 59,1467. 13s. 5d., making in all the sum of 210,000l., and reciting that by a deed of even date the London Assurance had assigned to the Prudential Assurance Company the life interest of the second Earl and the several mortgage debts due from him to them, it was witnessed that the second Earl and the petitioner jointly covenanted to repay the said sum of 210,000l., and in the exercise of their power jointly appointed, and by virtue of their respective estates and interests in the trust property as beneficial owners conveyed, the trust property to the Prudential Assurance Company as security for the repayment of the same. By an indenture of resettlement dated June 9, 1888, made between the second Earl and the petitioner and certain trustees, the second Earl, for divers considerations therein mentioned, covenanted to pay to the petitioner during the life of the second Earl an annuity of 30007. By various indentures between December, 1889, and September, 1893, the second Earl and the petitioner further charged the trust property with sums amounting in all to 20,000l. On February 28, 1895, the second Earl died. At that date the aggregate of the mortgage debts upon the trust property amounted to 230,000l., of which 199,9871. 11s. 8d. had been paid to or for the second Earl, and the residue had been paid to the petitioner. There were at that date still subsisting two of the annuities created by the will of the Earl of Morningtonnamely, one of 1000l. to Lady Victoria Wellesley, and one of 500l. to Captain Arthur Palliser. The petitioner, as the person to whom the trust property passed on the death of the second Earl, and as accountable for the estate duty, delivered to the Commissioners of Inland Revenue an affidavit which shewed the aggregate value of the property to be 538,4267. 11s. 1d. From that sum, for the purpose of assessing the value of the property passing on his father's death, and upon which estate duty was payable, he claimed to deduct, in Sched. III. to his affidavit, (1.) 51147. 15s., being the value of the annuity to Lady Victoria Wellesley; (2.) 38091. 15s., being the value of the annuity to Captain Arthur Palliser; (3.) a sum of 2161. 7s. ; (4.) the sum of 199,9877. 11s. 8d. above mentioned as having been paid to the second Earl out of money borrowed on mortgage; and (5.) the sum of 65,2007., being the capital value of the annuity of 30007. covenanted to be paid to the petitioner by the second Earl, and ceasing on the second Earl's death. The Commissioners of Inland Revenue allowed the deduction of items (1.), (2.), and (3.) in the said schedule, but disallowed the deduction of items (4.) and (5.). The petitioner appealed, and prayed a declaration that he was entitled to deduct (1.) the sum of 199,9871. 11s. 8d.; or, alternatively, (2.) the sum of 230,000l., being the whole amount of the mortgage debt; (3.) the above-mentioned sum of 65,2007. Haldane, Q.C., and H. Fellows (1), for the petitioner. By s. 1 (2) of the Finance Act, 1894, estate duty is to be payable (1) The Divisional Court intimated that in all cases of petitions under the Finance Act, 1894, they would hear two counsel on each side. (2) By s. 2, sub-s., 1 of the Finance Act, 1894, "Property passing on the death of the deceased shall be deemed to include the property following, that is to say VOL. II. 1897. E "(b) Property in which the de ceased or any other person had an interest ceasing on the death of the deceased, to the extent to which a benefit accrues or arises by the cesser of such interest." By s. 7, sub-s. 1, "In determining the value of an estate for the purpose 2 1897 EARL COWLEY'S ESTATE, In re. 1897 EARL COWLEY'S ESTATE, In re. on property passing on the death of the deceased. All that passed on the second Earl's death was an equity of redemption, and the value of that equity was alone the subject of duty. By s. 2, sub-s. 1, property passing on death is to be deemed to include property in which the deceased had an interest ceasing on his death, to the extent to which a benefit accrues by the cesser of such interest. The father's interest extended only to the income of the property less the interest on the mortgage debt. If part of a settled estate were sold during the lifetime of a tenant for life, on his death no duty would be chargeable in respect of the part sold, and a mortgage is in substance a sale of the property pro tanto. Sect. 7, sub-s. 1, which provides that in the cases to which it applies only certain classes of incumbrances shall be deducted, does not apply to settled estates at all. For it says that allowance shall be made for reasonable funeral expenses, and it cannot have been intended to impose upon a remainderman the expense of burying a tenant for life. But assume that the sub-section does so apply, the present case falls, to the extent of 199,9877. 11s. 8d., within the exception of an incumbrance created wholly for the deceased's own use and benefit, and taking effect out of his interest. The power of appointment under which the mortgage was granted was partially carved out of the father's life interest, and the section does not require that it should have taken effect wholly out of his interest. If, then, s. 7, sub-s. 1, applies to this case, the petitioner is entitled of estate duty allowance shall be made "(a) for debts incurred by the benefit and take effect out of his interest." Sub-sect. 7: "The value of the benefit accruing or arising from the cesser of an interest ceasing on the death of the deceased shall "(b) if the interest extended to less than the whole income of the property be the principal value of an addition to the property equal to the income to which the interest extended." to deduct the mortgage debt to the extent of 199,9877. 11s. 8d. If it does not apply, he is entitled to deduct the whole 230,0007. Secondly, the petitioner is entitled further to deduct the capital value of the annuity of 3000l. which was paid to him during his father's lifetime. It is said by the Crown that the property to which the petitioner succeeded was enlarged by the cesser of the annuity; but eo instanti it was lost to him. He was no better off by its cessation, and therefore no benefit accrued to him therefrom. Sir Richard Webster, A.-G., and Sir R. B. Finlay, S.-G. (Vaughan Hawkins with them), for the Crown. There is a confusion between the property taxed and the persons affected by the taxation. Sect. 1 does not say that duty is to be paid only on property passing to a person. The question is as to the extent to which property passed, and not as to the extent to which the petitioner benefited. Property passed on the death of the father to the full extent of the mortgaged property without any deduction in respect of the mortgage debt. Sect. 7, sub-s. 1, clearly applies to settled estates. The words "for reasonable funeral expenses and for debts" mean for expenses and debts where payable, and do not exclude the application of the sub-section to cases in which such expenses and debts are not payable. By the execution of the power of appointment, the father mortgaged his life interest and the son his remainder. If these interests had been separately mortgaged by different deeds, it would be clear that no deduction could be made. It can make no difference that they happen to have been mortgaged by the same deed. Limitations created by the execution of a power must be read as if they were introduced into the deed creating the power : Lord Braybrooke v. Attorney-General (1); Attorney-General v. Chapman. (2) If that principle be applied to this case the disposition by the mortgage deed must be read into the disentailing deed of 1887; and by that latter deed so read there was a conveyance of the life estate by the father and of the remainder by the petitioner. The fact that the father as protector of the settlement joined in that deed is immaterial, for (1) (1860) 9 H. L. C. 150. (2) [1891] 2 Q. B. 526. 1897 EARL COWLEY'S ESTATE, In re. |